Tag: Private Fund Transparency Act

Obama Plan for Financial Regulatory Reform and Private Investment Funds

obama plan

Along with the Hedge Fund Adviser Registration Act of 2009, the Hedge Fund Transparency Act of 2009 and the Private Fund Transparency Act of 2009, we also have the Obama plan for financial reform: Financial Regulatory Reform – A New Foundation: Rebuilding Financial Supervision and Regulation.

Under the Obama plan, all advisers to private pools of capital, including hedge funds, private equity funds and venture capital funds, would be required to register with the SEC under the Investment Advisers Act of 1940. There would be an exception for advisers whose assets under management did not exceed “some modest threshold.” All registered private investment funds would be subject to

  1. Reporting information on the funds they manage that is sufficient to assess whether any fund poses a threat to financial stability
  2. Recordkeeping requirements,
  3. Requirements regarding disclosures to investors, creditors and counterparties and
  4. Regulatory reporting requirements
  5. Regular, periodic examinations by the SEC to monitor compliance with these requirements
  6. Confidential reporting on assets under management, borrowings, off-balance sheet exposures, and other information deemed necessary to assess whether a fund or group of related funds is so large, highly leveraged, or interconnected that it poses a threat to financial stability.

As with the Hedge Fund Adviser Registration Act of 2009, the Hedge Fund Transparency Act of 2009 and the Private Fund Transparency Act of 2009, it is too early to tell what will come of this. Although, it seems clear that many private investment funds are going to be subject to greater regulation.

References:

More on the Private Fund Transparency Act of 2009

The full text of the Private Fund Transparency Act of 2009 has now been published (S. 1276). The press release from Senator Reed was nice, but I prefer to see the ink on the paper. So here is what I see n the Act:

Registration

The Act deletes the exemption from registration in Section 203 (b)(3) of the Investment Advisers Act and replaces it with an exemption for foreign investment advisers.  The (b)(3) exemption was for investment advisers with fewer than 15 clients and did hold themselves out as investment advisers. This was the exemption most often used by private investment funds.

Reporting:

“The Commission is authorized to require any investment adviser registered under this title to maintain such records and submit such reports as are necessary or appropriate in the public interest for the supervision of systemic risk by any Federal department or agency, and to provide or make available to such department or agency those reports or records or the information contained therein.”

This is a broad empowerment of the SEC to demand any report that they feel may be a systemic risk. The act fails to define “systemic risk.”

Identity of Clients

The Act would strike subsection (c) of Section 210 of the Investment Advisers Act.  That subsection prohibits the SEC from requiring the disclosure of an investment advisers clients (except in a SEC proceeding or enforcement action). So Senator Reed wants investment advisers to disclose their client lists and private investment funds to disclose their investors.

Defining Clients

The Act would all the SEC to “ascribe different meanings to terms (including the term ‘client’) used in different sections” of the Investment Advisers Act. I am not sure what this change would do. I suspect it is an attempt to address the demise of the Hedge Fund Rule and allow the SEC to define the investors in private investment funds as “clients” of the fund manager. The courts had ruled that the SEC overstepped their authority when they tried this definition on their own.

Final Thoughts

This Act seems much more intrusive to private investment funds than the Hedge Fund Adviser Registration Act of 2009 or the Hedge Fund Transparency Act of 2009.

At this point, it is not clear which of these competing acts will end up becoming law, if any.

References:

Private Fund Transparency Act

We have another bill that is proposing to regulate private pools of capital. Yesterday, Senator Jack Reed (RI) introduced the Private Fund Transparency Act of 2009 (S.1276)

According to the press release, the Private Fund Transparency Act of 2009 will:

  • Require all hedge fund and other investment pool advisers that manage more than $30 million in assets to register as investment advisers with the SEC. The remaining smaller funds will continue to fall under state oversight.
  • Provide the SEC with the authority to collect information from the hedge fund industry and other investment pools, including the risks they may pose to the financial system.
  • Authorize the SEC to require hedge funds and other investment pools to maintain and share with other federal agencies any information necessary for the calculation of systemic risk.
  • Clarify other aspects of SEC’s authority in order to strengthen its ability to oversee registered investment advisers.

The text of bill has not been released yet. I am not sure it matters given that there are already two other similar bills: Hedge Fund Adviser Registration Act of 2009 and the Hedge Fund Transparency Act of 2009. On top of that, the Obama administration is finalizing their proposed plan for changing the regulatory framework of the financial industry.

I  found Senator Reed’s reasoning on the need for his proposed law to be an interesting perspective:

“Private funds are not currently subject to the same set of standards and regulations as banks and mutual funds, reflecting the traditional view that their investors are more sophisticated and therefore require less protection. This has enabled private funds to operate largely outside the framework of the financial regulatory system even as they have become increasingly interwoven with the rest of the country’s financial markets. As a result, there is no data on the number and nature of these firms or ability to calculate the risks they pose to America’s broader economy.”

Press Release from Senator Reed on the Private Fund Transparency Act